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What competition would do to the NBN

The NBN Co chairman let the cat out of the bag when he appeared before a Senate committee and discussed the economic impact of competition on network infrastructure.

Ziggy Switkowski has provided a disturbing insight into the impact that competition to the national broadband network might have. It would effectively put a wrecking ball through the economics of the NBN.

Appearing before a Senate committee today, the NBN Co chairman said that allowing TPG Telecom to continue with its planned roll-out of its own wholesale fibre-to-the-basement broadband network in metropolitan areas could have an economic impact on the NBN of five to 10 per cent.

If other infrastructure-based competitors emerged the impact would be amplified and the economics of the NBN would be ‘’severely impacted.’’

Telstra and Optus have been conducting their own trials of fibre-to-the-basement technologies – connecting apartment buildings with fibre and using the existing copper within the complexes to deliver broadband – and both have threatened to roll out their own networks if TPG’s is allowed to proceed.

TPG announced its plans last year, exploiting a provision in Labor’s NBN legislation that allows companies to extend networks built before 2012 by up to a kilometre. TPG acquired a lot of fibre when it bought PIPE Networks in 2009 for about $370 million.

If TPG alone could knock up to 10 per cent of the value of the NBN by targeting the 500,000 urban customers it says could connect to its network then a competitive response from Telstra and Optus – and inevitably from NBN Co itself -- would decimate the NBN’s economics.

Switkowski said NBN Co would lay out the consequences of different industry models within its contribution to the cost-benefit analysis Malcom Turnbull commissioned for the NBN and which is scheduled to report around the middle of the year. Even without precise numbers, however, it is obvious that competition with the metropolitan regions would be devastating for the NBN.

Turnbull’s preferred version of the NBN, which NBN Co is now pursuing, will still cost an estimated $41 billion even though it will use a mix of technologies including copper and the two HFC networks owned by Telstra and Optus to deliver mainly fibre-to-the-node.

Where Labor’s fibre-to-the-premises network was supposed to deliver a 7.1 per cent rate of return after spending $44 billion to build its version of the NBN (which Turnbull’s strategic review re-costed at $72.6 billion) the Turnbull version is forecast to deliver a return of only about 5.3 per cent. That’s without infrastructure-based competition within the metropolitan markets.

While Turnbull has expressed a predilection for competition, if the most densely populated and affluent regions serviced by the NBN are targeted -- ‘’cherry-picked’’ -- by competitors there will be a leveraged impact on its economics which could only be offset by raising wholesale prices in less competitive regions, which would undermine the concept of a ‘’national’’ broadband network.

It would also almost guarantee that NBN Co and its borrowings would have to be brought on-budget because it would fail to generate enough of a return, if any, to cover its cost of capital but, while that would annoy Joe Hockey, it isn’t the most important implication.

The entire concept of an NBN is to make high-speed broadband available across the nation at, as far as possible, broadly uniform prices. In practice, given that retail competition is likely to be most intense in the capital cities, it won’t deliver perfectly uniform retail prices but its wholesale prices will be uniform.

That pricing structure will enable NBN Co to internalise a very substantial cross-subsidy from metropolitan end-users to the far higher cost-to-serve rural and regional customers. Large parts of the NBN’s network will actually lose money, with urban profits funding those losses – as long as the urban profits are sufficiently large.

If, however, there is large-scale competition in urban areas that drives down localised wholesale prices, the capacity to fund that cross-subsidy will be greatly diminished.

Either there would be a significant differential in the prices at which urban and regional end-users could get access to high-speed broadband or the government would have to provide an explicit and very expensive direct subsidy for rural and regional services.

Alternatively, and purely for the cosmetics, it could write-off most of the capital cost of the rural and regional infrastructure – digest a big loss for all taxpayers – to effectively capitalise the subsidy and enable NBN Co to report respectable returns.

Turnbull could mitigate the impact by mandating wholesale prices so that competitors couldn’t under-cut NBN Co but that would still siphon a lot of revenue and profit from NBN Co and effectively deliver monopoly profit to its competitors.

The obvious option for the government is to prohibit all infrastructure-based competition, as Stephen Conroy tried to do when he paid Telstra and Optus to not use their HFC networks for broadband.

As my colleague Alan Kohler concluded recently (Sorry Malcolm, the NBN must be a monopoly, 3 March), there doesn’t appear to be an alternative if NBN Co is to deliver a wholesale national broadband network with uniform prices and be kept off-budget.

Competition is a marvellous thing but it destroys cross-subsidies and the NBN doesn’t work financially and doesn’t deliver its national, social and economic objectives without one.

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